Observant stock market investors are taking note of a development in the bond market, and its implications could be cause for concern. In a warning sign for the stock market, the spread between 2-year and 10-year bond yields is down to just 43 basis points, its lowest level since 2007. A flat or inverted yield curve, in which yields on bonds with a shorter duration are equal to or higher than yields on bonds with a higher duration, generally means that investors are losing confidence in the strength of the economy. When there is little difference in the yields of short- and long-duration bonds, pressures mount on the financial sector where the business mantra “Borrow Short and Lend Long” spells trouble when there is little, no, or even negative difference between “Short” and “Long”. The Treasury yield curve inverted before the recessions of 2000, 1991, and 1981. In addition, the yield curve also presaged the 2008 financial crisis by two years.
Borrow Short and Lend Long
| May 21, 2018